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The art of law - the oppression remedy protects minority shareholders against unfair treatment

The remedy for oppression in the new Companies Act of 2008

The judgment of the Supreme Court of Appeal in Grancy Property Ltd v Manala [2013] ZASCA 57, handed down on 10 May 2013, is the first decision of that court on the interpretation of section 163 of the Companies Act 71 of 2008, a provision that empowers the court to grant relief to an applicant where -

(a) any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;
(b) the business of the company, or a related person, is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant; or
(c) the powers of a director or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.

At the centre of this provision is the power of the court to grant relief where there has been "oppressive" or "unfairly prejudicial" conduct in relation to a shareholder or director.

The predecessor of this provision was section 252 of the now-repealed Companies Act of 1973 which was expressed in similar, though not identical terms.

In the present case, the court affirmed the interpretation of what constitutes oppressive conduct, as laid down in Aspek Pipe Co (Pty) Ltd v Mauerberger 1968 (1) SA 517 (C) which held (at 525H-526E) that -

'"Oppressive" conduct has been defined as "unjust or harsh or tyrannical" . . . or "burdensome, harsh and wrongful" . . . or which "involves at least an element of lack of probity or fair dealing" . . . or "a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. . ."

Factual background to the case

In the present case, a minority shareholder of the company in question averred that certain named directors (who had since resigned) had engaged in conduct that disregarded its interests, inter alia by paying themselves unauthorised remuneration and by withdrawing funds from the company for payment to themselves.

The applicant had been unsuccessful in the Cape High Court.

Predictably, the directors in question denied the allegations of wrongdoing. However, the court pointed out (at para [18]) that they did not seriously dispute that the amounts of money in question had in fact been paid to them, though they averred that they were entitled to those amounts. Significantly, the directors did not take issue with a report by the company's auditors, recording grave irregularities committed by them.

The court held (at para [20]) that the denials of wrongdoing by the directors in question in the affidavits that had been laid before the court were insufficient to raise a real dispute of fact. This finding opened the way for the court to make an order on the basis of the affidavits laid before it, without requiring oral testimony from witnesses.

The order of the Supreme Court of Appeal

In the result, the court held that the applicant had succeeded in making out a case for relief in terms of section 163 of the Companies Act 2008.

The court ordered that a stipulated senior counsel practising at the Cape Bar and a senior chartered accountant from a leading firm of accountants were to be appointed as independent directors of the company and that they were to have the sole right, in their absolute discretion and to the exclusion of the company's other directors, to determine whether there should be an investigation into the company's affairs in the light of the allegations that had been made against the directors in question. The order further provided that those independent directors could not be removed from office except by the unanimous vote of the company's shareholders or by an order of the high court.

The striking features of the judgment

The terms of the court order are a striking illustration of the preparedness of the courts to devise an order that is tailor-made to the circumstances of the particular case and - as in the present matter, where the alleged wrongdoing by the directors in question had yet to be conclusively determined - to make an order that sets in train an extrajudicial process that will bring to light whether oppression or unfair conduct has indeed taken place.

The order made by the court was to operate as interim relief until the order was either confirmed or discharged at the pending high court trial.

Clearly, however, if the investigation were, in due course, to confirm that oppression had indeed taken place, the applicants could then, inter alia, apply to court to have the responsible directors declared delinquent in terms of section 162(5)(c) of the Act, which would bar them from being the directors of any company, as envisaged in section 69(8)(a).

A major point of interest in this judgment is that the invocation of the oppression section of the Companies Act was successfully brought by way of application proceedings (in which relief is sought on the basis of affidavits laid before the court, without the calling of witnesses) since application proceedings are appropriate only where there is no real dispute of fact.

The Supreme Court of Appeal in this case overcame the difficulty of not having sufficient information to justify the making of a final order by setting in train a process whereby the company itself, under the direction of the court-appointed independent directors, could undertake the necessary investigation into the disputed facts and report back to the court.

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